WeWork Goes to Zero

Global Workspace Association, NAIOP, Brookfield, Convene, IBM, Manhattan, Hines, Commercial Real Estate Development Association, Flexible Office Conference
WeWork HQ Chelsea Commons New York, NY

By Dan Mihalovich

First, the disclosures:

  • This article will take longer than 60 seconds to read. My apologies. Stop now, perhaps.
  • Sorry, but I’ve puked over reading several analysts’ epitaphs about WeWork. This is not another one of those Ponzi-scheme liturgies. I am not an SEC-licensed analyst; I have no stock advice for you, and none should be taken from this article. 
  • I’m a licensed California Real Estate Broker with an earlier career in basis trading. Translated: I understand market supply/demand fundamentals; I’m capable of negotiating more effectively than most, as a result; and I believe not a shred in technical (charting) analysis.
  • Wall Street will never recommend shorting the market.
  • Save me: When a young company says that they’re “going to change the world,” just turn and run.
  • Your crystal ball and mine are made of the same material: Spit, grit, bit of glass, wisdom beyond our years >>> worthless toward predicting jack. So, humble pie for dinner folks.
  • I’ve never and never will hold a position in WeWork stock.

There you have it: WeWork’s valuation – and stock value, if ever they actually go public – will go to zero. Argue with me till you’re blue. Let’s hear about fundamentals of their sound business plan, their prospects for profitability (as if anyone really cares about such things), their amazing core team, their uniqueness in the marketplace, and their absolute edge, which (once upon a time, a few weeks ago) made them a $45 billion company. 

As we wrote in 2015, WeWork didn’t blaze a new trail in the executive suite/co-working space. Other companies did that decades earlier. But WeWork leveraged its growth in unforeseen and reckless ways, as it turns out. Just a few weeks after their IPO filing and the release of statements to the public uncovering their inscrutable path to endear the public’s trust, WeWork’s prospective valuation declined to $10 billion. Commence with circling the drain.

All new leasing has stopped. Well, of course; WeWork has lost the confidence of the landlord community. Thousands of employees will be terminated. Senior staff departures have commenced. All under the weight of massive debt that could only resolve through cash infusions from the IPO. With plummeting valuation, WeWork cannot grow. One of their most stable sources of revenue – large corporate clients – may bail out in search for more trustworthy landlords elsewhere. 

WeWork has been on a tear: In any major metropolitan city, if a large block of office space was available for lease, better bet that WeWork was trying to lease it. Cleverly, they negotiated non-recourse leases, only offering the landlord to attach their assets attributable to that building. Why would any landlord agree to such a loose agreement? (A) The landlord is an investor in WeWork; (B) WeWork put up a huge security deposit; (C) WeWork invested heavily in the tenant improvement construction, effectively increasing the value of the landlord’s asset (assuming that a landlord could foresee salvage value in what WeWork built); (D) WeWork might offer warrants or some form of stock to the landlord; and/or (E) Everyone’s been doing it. WeWork has been off the charts effective as a sales entity. Aggressive, pushy, assertive and convincing. As I wrote some time ago (see below), 10 Billion Doughnuts Can’t Be Wrong; everyone’s eating ‘em. What’s the worry?!

When, not if, WeWork becomes delinquent in their lease payments, landlords will begin (if not already) to review the due diligence evidence provided by WeWork at the time the negotiations commenced. Were landlords bamboozled? I envision cadres of lawyers around the world reviewing the trail that led to currently uncomfortable leasing situations with WeWork – looking for fraud and preparing their clients for the worst. What could they sue to get? Due rent and escalations; for damages; potentially for fraud, if discovery finds that the financial materials first submitted by WeWork were puffed. They could sue to terminate the lease and capture the security deposit and all assets on the premises vs. standing in line in bankruptcy court to see if the judge awards them anything.

What is the salvage value of WeWork office space? Are these spaces assets or liabilities? What we already know is that their typical space is more densely populated than any other space we’ve seen. Municipalities around the country have been turning a blind eye to the code violations – since their body counts exceed what codes permit for restroom access. To placate people in cramped quarters, WeWork used glass partitions everywhere to give folks some sense of openness. But the lack of privacy drives some people to the restrooms, where at least there’s more privacy than in the office space. Which leads to another problem created by WeWork: Their “tenants” (actually licensees) search other non-WeWork floors in the building to use the restrooms  and the building tenants don’t like it. So, what will WeWork’s suitor do with the space? 

Landlords to WeWork can take over the space and try to continue on with the licensees currently on contract with WeWork. But most building owners don’t want to be in this business – or they’d have done it already. CBRE recently entered the co-working business. Perhaps landlords will engage CBRE or other such operators to take over operations, or sign leases with operators and offset their risk to them. But WeWork’s full floors everywhere – cut up into small compartments — aren’t suitable for the vast majority of tenants, even tech tenants. I suspect most of their space will be demolished and marketed from scratch. Considering the lofty rental rates and high construction costs around the country, marketing shell condition space is a tough proposition.

One of the most appalling aspects of the WeWork debacle is the almost casual way the industry has digested this news. During the Dot-Bomb, the most sensational story told of the disintegration of Pets.com, a $500 million company. That’s “million.” Perhaps it’s been the printing/injecting of $4 trillion into our economy since 2007 that’s led to a relenting chase for all assets that diverts our attention from the train wrecks littering the road. What’s sensational about a company losing $35 billion (or more) or its value over a period of a few weeks? Well, everything. WeWork may not be a tech company, yet they’ve raised money in similar fashion to the tech community and endeared themselves to thousands of frothed admirers. Their demise will sting for a long time and potentially sour the prospects and valuations for young startups everywhere. Of course the story is ongoing.

During the past week, SoftBank, who’s largely breathed life into WeWork during the past few years, surfaced with a prospective bailout plan. JPMorgan or others may be circling the cadaver, as well. It appears to be bailout vs. bankruptcy. The main question remains: Does WeWork need to exist? What is their purpose in the marketplace? Are they credible? If not, they go to zero.

I’m leaving you with a few pearls below, including an article I wrote about the economics of living in co-working space vs. occupying “normal” lease space. And yes, the bit about 10 billion doughnuts. 

Cheers, everyone. 

Working with WeWork: A Broker’s and Real Estate Counsel’s Commentary

The Space Place Editorial, 3Q 2005:

10 Billion Doughnuts Can’t Be Wrong

Appalling, isn’t it, that Americans produce ten billion doughnuts each year? You don’t need to be Dr. Dean Ornish to know that doughnuts can kill. Evidently, though, the health message isn’t quite as deafening and alluring as the PR from the other side of the board room. Doughnuts, like a lot of sugar-coated ideas, sell big-time. “Spin” works wonders. Why? Because people believe it and act on it. Does the proposition make sense and stand up to intense research? Oftentimes, not. But we buy anyway. Did you chase a dot-com stock or two? Well, the stock was climbing at a meteoric rate, so you bought it…and made money for a while. Until you lost it. The investment community is out there right now, armed with billions upon billions of investment dollars—shopping for trophy buildings, REIT portfolios, corporate buyouts—all with cheap-interest money; foreigners with cheap dollars; and banking on sugar-coating and repackaging these investments to deliver to your front door. Never mind that the numbers don’t make sense. It’s the sizzle, friends, that sells.

The 50-Years War: Can the U.S. Economy Afford It?

There is no rule of law stipulating that the War On Terror will ever end. Could it go on for fifty years? Are there not examples around the globe of unresolved conflict continuing for such periods? We have, then, fair warning. But we do not heed warnings, oftentimes, as discussed above. How is it impossible that our monthly commitment of $6-7 billion won’t continue indefinitely and how can we afford the bill? We were warned about faulty levies in the South. Aside from the cataclysmic human loss, our failed warning system will cost us $100 billion or more. We’ve been warned of global warming, shortages in refining capacity and the bird flu. Will we need a recession or widespread blackouts to snap us back into shape?

An old economics professor explained it this way. In difficult times, for prolonged periods as necessary, the United States will “export its recession”. This is accomplished through monetary policies, in part, with historically low interest rates to stimulate job growth, development and business investment at home; and cheap money for foreigners to stimulate investment in and exports from the U.S. Our labor and products become relatively inexpensive—at the expense of foreigners. Our companies and other prime assets become relatively cheap—at the expense of foreigners. Our economy, under this policy, is expected to outgrow its hard times—at the expense of foreigners. We “export” our troubles. Thank you, especially if you bought the ten billion doughnuts.

The war machine is no slouch for the U.S. economy. At 160,000 troops in Iraq and Afghanistan (and growing), we’ll hit $348 billion in “emergency spending” from the inception through 2006. Fathom such an investment in our economy at home. The investment abroad, however, knows no end. While there are feeble attempts to scratch out a few reductions in Fed spending, the transportation bill, according to the New York Times, is $30 billion higher than the president initially demanded; permanent extensions of (2001-2003) tax cuts and dissing the alt-min tax would add $2.4 trillion in debt (plus interest) over the next ten years. A trillion here, a trillion there. We can’t afford it. Bright ideas accepted, although it would be better if you’d just run for office.

Is this affecting us locally? You bet. But do you have time to pay attention?

The Space Place Editorial: 2Q 2015:

Shared Workspace for $160/sq ft/year?! Hurts So Good.

Startups by the thousands have flocked to “co-working spaces” around the country to make their first home. To this office leasing veteran, “collaborative” space… “shared office space”…”executive suite space”…has been around since the beginning of time. The wave of national expansion and explosion of growth amongst space providers has become intensely competitive. As the building cranes fly, so has the co-location-space business to keep up with white-hot demand. In San Francisco, the old stalwarts like Regus, ServCorp and ReadiSuite have seen scores of recent births — and a few massive new players like WeWork. Just as startups put on the dawg to woo new employees, the suite operators have figured out how to endear themselves to the startup community. Free beer. C’mon. Cool digs. Dogs. Resources — not just the dry provision of office admin stuff, but access to VC/Angel funders, pitch-nights, financial advisory support, legal support, pet supplies and of course, adult toys. Trust that this dynamic is amazing for the providers — which is why you’re currently seeing ridiculous expansion from the provider community; and, wow, these environments are totally happening social and networking environments at apparently reasonable costs — with great flexibility for the startup community to grow and then go. 

But try to ignore the cost per square foot, folks. And the “lease” document? It’s essentially an adhesion contract, like a contract for renting a car. You’re not exactly invited to make changes. Just think: My way or the highway. Following (changing the name to Space to Go, “S2G”, to protect the guilty parties) are real-life economics for a client presently considering entering into a shared-space contract:

ECONOMICS:

In order to equate S2G’s rent with “normal” rent for office space outside their Center, we should apply an interior circulation factor (40%) and a Building load factor (use 20%) to arrive at “rentable square feet” elsewhere. This is consistent with what we engineered into Griddig’s transaction platform tool, “Calculate ”. 

So, a 96 square foot office at S2G = 96 times 1.40 = 134.4 “traditional usable square feet” times 1.20 load factor = approx. 161 “traditional rentable square feet”. S2G’s $2,150/month rent for 96 square feet corresponds to $25,800/year/161 rentable square feet, or $160.25/rsf/year. Not a bad mark-up for the S2G folks!

Dan Mihalovich is the Founder & CEO of The Space Place, a San Francisco based commercial tenant-representation firm.

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